The criminals in the finance and banking system

Betting derivatives and conducting proprietary trading or gambling.


Below are three short paragraphs that could really summarized the shit situation JP Morgan is in as well as many to big to fail bank and sovereign wealth funds. The first is about derivatives and how this monster has grown to a size that could destroy not only the biggest banks but also taking down the global finance and banking system with it.

Simply, ‘A derivative buys you the option (but not obligation) to buy oil in 6 months for today's price/any agreed price, hoping that oil will cost more in future. (I'll bet you it'll cost more in 6 months). Derivative can also be used as insurance, betting that a loan will or won't default before a given date. So its a big betting system, like a Casino, but instead of betting on cards and roulette, you bet on future values and performance of practically anything that holds value. The system is not regulated what-so-ever, and you can buy a derivative on an existing derivative. ….no economist in the world knows exactly how the derivative money flows or how the system works, while derivatives are traded in microseconds by computers, we really don't know what will trigger the crash, or when it will happen, but considering the global financial crisis this system is in for tough….the 9 largest ‘American and European’ banks hold a total of $228.72 trillion in Derivatives - Approximately 3 times the entire world economy. No government in world has money for this bailout.’ These paragraphs are copied from Democracy.info

When banks are indulging in such huge bets, they need to cover their backsides through hedging, betting against a loss position.

‘A JP Morgan trader, Bruno Iksil, has been accumulating a giant bet on U.S. corporate bonds. He used derivatives to do it, and he messed up the bet and lost $2 billion for the bank. He could end up losing $1 billion more if the market doesn't cooperate.’ According to Market Place Easy Street blog.

To add into the mess, banks used to be conservative but could not resist the big money that traders were making. They too want a piece of action for themselves. How else would they be able to make the kind of crazy profits to pay the kind of crazy money to their top management and traders? The big salary must be foot by some operations, and they went for proprietary trading, ie trading themselves with the bank’s or clients’ money. The more they traded, the more hedging they needed and the more derivatives would be written. And they ended up with a mountain of debt, swaps, derivatives and betting slips that they probably did not know what was happening and any small changes in a position could end up in huge losses.

To summarise, fraudulent banking practices were allowed to go on, deregulation allowed the banks and their traders to do as they pleased with the regulators just as blurred as to what was going on. The regulators just lapped it up on whatever information the banks and their traders told them, if they were not in cahoot. When they said everything was in order, under control, the regulators could not be more happy even if it was a big white lie. How could the regulators allow the derivative transactions to balloon to US$228 trillion? Imagine the risk involved and the amount of losses should anything goes wrong? Do they have any clue what is happening? They don’t even have any clue about banks rigging Libors!

And they allowed the presumably smarter banks and traders write bets on anything, and they have not the slightest clue of what they were. And when pushed to allow the banks to trade their own money, even against their clients’ position, the regulators were as good as raising the white flag. Let them do whatever they want, just don’t create a mess, as they were lost in the maze of financial instruments and betting slips. The banks were addicted to gambling as they need to pay their robbers at the top with millions per head and hundreds of millions annually. No amount of loans officers and tellers could make this kind of money to pay these turkeys. Only gambling in derivatives could feed their appetite.

And all it needs is a little trigger and for a bank to surrender when it is no longer able to conceal its losses and cooking of the books, everything is going to come down very quickly. All the façade of well ran, well managed sophisticated systems and instruments by the best brains from Harvard and other Ivy League universities was only a great deception with each rogue bank or trader trying to disguise their excesses for as long as they could, and to demand as high a compensation package, plus an equally atrocious severance package. These turkeys cannot lose. Only the clients of the banks and the general taxpayers that would eventually have to foot the bill.